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| Section | Weight | Objectives |
|---|---|---|
| Topic 1: Financial policy decisions | 15% | - Formulation of financial strategy
|
| Topic 2: Financial risks | 20% | - Managing financial risks
|
| Topic 3: Business valuation | 40% | - Corporate finance and valuation
|
| Topic 4: Sources of long-term funds | 25% | - Financing and dividend decisions
|
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NEW QUESTION # 139
XYZ is a multi-national group with subsidiary AA in Country A and subsidiary BB in Country B. The capital structures of AA and BB are set up to take advantage of the lower tax rate in Country A Thin capitalisation rules in Country B will limit the ability for either AA or BB to claim tax relief on:
Answer: C
Explanation:
Thin capitalisation rules in Country B restrict tax relief on excessive interest deductions of companies resident there. That means they limit deductions for:
Interest paid by BB, the subsidiary in Country B.
NEW QUESTION # 140
Which THREE of the following methods of business valuation would give a valuation of the equity of an entity, rather than the value of the whole entity?
Answer: B,C,E
Explanation:
We want methods that give the value of equity, not the value of the whole entity.
A). D# / (k# - g) # Gordon growth dividend model = value of equity (share value). #
B). Total earnings × P/E # market capitalisation = equity value. #
C). Free cash flows to all investors discounted at WACC # enterprise / firm value (equity + debt). #
D). Free cash flows to equity discounted at cost of equity # equity value. #
E). NCA + CA # CL # value of net assets before deducting long-term debt, i.e. value of the business to all capital providers, not just equity. # So correct choices: A, B, D.
NEW QUESTION # 141
G pic wishes to borrow $5 million in 6 months, for a period of 3 months. A bank has quoted the following Forward Rate Agreement (FRA) rales:
3 v 9 6.55%-6.70% 6v9 6.70%-6 90%.
G pic can borrow at 0 75% above base rate, and the base rate is currently 6.25% Concerned that base rates may rise, G pic decides that it will hedge using an FRA At the settlement date for the FRA, the base rate has risen to 7.50% What is the effective interest rate paid by G pic for its borrowing?
Answer: C
Explanation:
G plc will borrow at base + 0.75% # 7.50% + 0.75% = 8.25%.
To hedge, as a future borrower it uses the 6v9 FRA offer rate = 6.90%.
Difference between actual base and FRA = 7.50% # 6.90% = 0.60%.
Interest difference over 3 months on $5m = 0.006 × ¼ × 5,000,000 = $7,500 (received from FRA).
Net interest paid = 8.25% interest # 0.60% benefit = 7.65% effective rate.
NEW QUESTION # 142
A company is considering whether to lease or buy an asset.
The following data applies:
* The bank will charge interest at 7.14% per annum
* The asset will cost $1 million
* Tax-allowable depreciation is available on a straight line basis over 5 years
* There is no residual value
* Corporate tax is paid at 30% in the year when the profit is earned
What is the NPV of the buy option?
Give your answer to the nearest $000.
Answer:
Explanation:
$ ?
$740,000 (negative NPV of buy option)Under CIMA F3's lease-or-buy framework, the buy option is evaluated by discounting the after-tax cash flows associated with owning the asset. When an asset is purchased, the immediate cash outflow is the purchase price, but ownership provides a benefit through tax- allowable depreciation, which creates an annual tax shield (a reduction in tax payable). Because corporate tax is paid in the same year that profit is earned, the depreciation tax shield arises each year from Year 1 to Year 5.
Step 1: Initial cost (Year 0 outflow)Asset cost = $1,000,000 (cash outflow at time 0).Step 2: Annual tax depreciation and tax shieldStraight-line over 5 years, no residual value:Depreciation = 1,000,000/5=200,0001
{,}000{,}000 / 5 = 200{,}0001,000,000/5=200,000 per year.Tax shield each year = 200,000×30%=60,000200
{,}000 \times 30\% = 60{,}000200,000×30%=60,000.Step 3: Discount rateCIMA F3 applies the after-tax cost of debt when valuing tax-deductible flows funded by borrowing:After-tax discount rate = 7.14%×(1#0.30)=4.
998%#5%7.14\% \times (1 - 0.30) = 4.998\% \approx 5\%7.14%×(1#0.30)=4.998%#5%.Step 4: Present value of tax shields (5-year annuity at 5%)Annuity factor = 1#(1.05)#50.05=4.32948\frac{1 - (1.05)
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